Waddell & Reed Financial, Inc. Reports Fourth Quarter Results

OVERLAND PARK, Kan.--(BUSINESS WIRE)--
Waddell & Reed Financial, Inc. (NYSE: WDR) today reported fourth quarter
2017 net income1 of $29.8 million, or $0.36 per diluted
share, compared to net income of $53.6 million, or $0.64 per diluted
share, during the prior quarter and net income of $29.0 million, or
$0.35 per diluted share, during the fourth quarter of 2016.

Subsequent to the freeze of the pension plan in the third quarter of
2017, we elected in the fourth quarter to change to mark-to-market
accounting for the pension plan. The impact from this change in
accounting policy has been retrospectively applied to the financial
results for all periods presented. These adjustments are non-cash and do
not affect our pension liability. Supplemental schedules that include
information regarding the prior quarter adjustments have been included
with the Current Report on Form 8-K furnished to the SEC today and are
also available on the Investor Relations section of our Web site at ir.waddell.com.
The impact of the pension expense during the current quarter was $5.9
million ($4.5 million net of taxes) or $0.05 per share.

The enactment of the U.S. tax reform required us to revalue our net
deferred tax asset, which resulted in a tax charge during the quarter of
$5.4 million, or $0.07 per share.

Operating revenues of $294.5 million during the fourth quarter of 2017
increased 2% sequentially and 1% compared to the fourth quarter of 2016.
The operating margin during the current quarter was 18.8% compared to
27.6% during the prior quarter and 16.4% during the same period last
year. Pension expense caused most of the sequential variance in our
operating margin.

As part of our initiative to improve corporate efficiency, we announced
a plan last July that is expected to add between $30 and $40 million to
pre-tax income by 2019. During 2017, we were able to reduce the run-rate
for operating costs by approximately $20 million. In January 2018, we
paid off $95 million of Series A senior notes at maturity, which will
reduce annual interest costs by approximately $5 million. We have also
fully implemented a laddered fixed income investment portfolio to
optimize the return on our cash, which we estimate will add up to $5
million per year to investment income depending on the pace of share
repurchases and on the cash needs of other corporate initiatives.
Offsetting some of our progress to date is the reduction of management
fees associated with the previously announced fund mergers. We estimate
the impact of reduced management fee revenues to range between $10 and
$11 million in 2018. We continue to work toward our cost savings goal
and expect to reach our run-rate in 2019.

Assets under management ended the year at $81.1 billion, unchanged
compared to the prior quarter and to the prior year end. Sequentially,
gross sales declined slightly. Net outflows were $2.7 billion during the
quarter, compared to net outflows of $2.8 billion during the prior
quarter and net outflows of $4.4 billion during the fourth quarter of
2016. Redemption pressure eased meaningfully over the last 12 months;
however, gross sales volume remains subdued, improving only 1% annually
compared to the year 2016. As a result of lower redemptions, net
outflows improved to $11.4 billion during 2017 compared to net outflows
of $25.3 billion during 2016.

“Over the past year, we have made solid headway in strengthening our
investment management capabilities and increasing the competitiveness of
our broker-dealer. Despite this progress, work remains to be done to
continue to improve our investment performance across our product
lineup, advance our broker-dealer initiatives and improve our sales
execution in all of our distribution channels,” said Philip J. Sanders,
Chief Executive Officer of Waddell & Reed Financial, Inc. “Our team
enters 2018 with a new level of energy and focus.”

Financial Analysis

Under the new pension accounting method, actuarial gains and losses are
recognized in the year incurred rather than amortizing them over future
periods. The net impact of this change resulted in an increase to net
income of $12.7 million, or $0.15 per share, during 2017.

“The reporting method change for our pension plan will eliminate the
timing impact of past actuarial gains and losses from current operating
results,” said Brent K. Bloss, Waddell & Reed’s Senior Vice President
and Chief Financial Officer. “We are currently implementing a de-risking
strategy for the plan’s assets following the freeze of the plan, which
should result in less volatility when comparing actual results of the
plan assets to actuarial assumptions in the future. Our pension plan
remains well funded and this change will have no effect on our employee
benefits under the plan.”

Management Fee Revenue Analysis

Revenues increased 2% sequentially due to an increase in average assets
under management and a small increase in the effective fee rate.
Compared to the same period last year, revenues rose 3% as an increase
in the effective fee rate more than offset a small decline in average
assets under management.

During the current quarter, the effective management fee rate was 66.5
basis points, compared to 66.1 basis points during the third quarter of
2017 and 64.4 basis points during the fourth quarter of 2016. Average
assets under management were $81.3 billion during the current quarter,
compared to $80.5 billion and $82.0 billion during the third quarter of
2017 and the fourth quarter of 2016, respectively.

Underwriting and Distribution Analysis

Underwriting and Distribution Revenues

Revenues increased 3% sequentially. The increase in revenues was mainly
due to higher advisory fees in our broker-dealer, and to a lesser
degree, higher sales commissions. Revenues declined slightly compared to
the same quarter in 2016, as the increase in advisory fees in our
broker-dealer were offset by lower asset-based Rule 12b-1 service and
distribution fees in our retail unaffiliated channel.

Underwriting and Distribution Costs

Direct costs increased 1% sequentially due to higher advisory fees in
our broker-dealer. Indirect costs increased 21%. Most of the variance is
due to a $9.4 million increase in pension expense. The third quarter
included a benefit from the valuation associated with the pension plan’s
freeze in September, while the current quarter included costs associated
with the plan’s re-measurement.

Compared to the same quarter in 2016, direct costs declined 4% due
primarily to the realignment of field management compensation from U&D
direct to U&D indirect in our broker-dealer. Indirect costs declined 6%
due to a combination of lower wholesaler compensation and IT support.
The increase in compensation associated with the field realignment in
our broker-dealer was more than offset by lower sales and support costs
for this channel.

Compensation and Related Expense Analysis

Costs increased 78% sequentially. Most of the variance is due to a $21.3
million increase in pension expenses. The third quarter included a
benefit from the valuation associated with the pension plan’s freeze in
September, while the current quarter included costs associated with the
plan’s re-measurement. Higher incentive compensation, benefits and
share-based compensation contributed approximately $2 million in
aggregate to the sequential increase in costs. Compared to the same
quarter in 2016, costs rose 5% due to higher share-based compensation.

General and Administrative Expense Analysis

Costs decreased 14% sequentially due to a combination of lower legal and
consulting costs and reduced usage of temporary office staff. Compared
to the same period in 2016, costs increased 7%. The year over year
increase in cost was due to higher IT costs and additional use of
temporary staff.

Income Tax Expense Analysis

The effective tax rate for the quarter was elevated due to a revaluation
of our net deferred tax asset and other tax adjustments resulting from
the enactment of U.S. tax reform of $5.4 million, or $0.07 per share, as
well as a tax shortfall on restricted stock vesting in the quarter of
$1.8 million, or $0.02 per share.

We estimate a tax run rate for 2018 to be in the range of 23% to 25%,
though the actual effective tax rate may differ due to nonrecurring or
discrete items and issuance of additional guidance on, or changes to our
analysis of, recent tax reform legislation.

Investment Management Performance

Starting in June 2017, we began using I shares in our rankings. This
change was made to use a consistent share class that aligns with the
industry’s sales and asset concentrations. Performance in prior periods
utilized each funds’ older share class, which was generally the A shares.

Stockholders, members of the investment community and the general public
are invited to listen to a live Web cast of our earnings release
conference call today at 10:00 a.m. Eastern. During this call, Philip J.
Sanders, CEO and CIO, will review our quarterly results. Live access to
the teleconference will be available on the “Investor Relations” section
of our Web site at ir.waddell.com. A Web cast replay will be made
available shortly after the conclusion of the call and accessible for
seven days.

Web Site Resources

We invite you to visit the Investor Relations section of our Web site at ir.waddell.com.
Under the “Investor Information” tab you will find a link to
presentations as well as to data tables, which include supplemental
information schedules.

Through its subsidiaries, Waddell & Reed Financial, Inc. provides
investment management and financial planning services to clients
throughout the United States and internationally. Waddell & Reed
Investment Management Company serves as investment adviser to the
Waddell & Reed Advisors Group of Mutual Funds, while Ivy Investment
Management Company serves as investment adviser to Ivy Funds, Ivy
NextShares, Ivy Variable Insurance Portfolios and InvestEd Portfolios,
and investment adviser and global distributor to the Ivy Global
Investors SICAV, an umbrella UCITS fund domiciled in Luxembourg.
Waddell & Reed, Inc. serves as principal underwriter and distributor to
the Waddell & Reed Advisors Group of Mutual Funds and InvestEd
Portfolios, while Ivy Distributors, Inc. serves as principal underwriter
and distributor to Ivy Funds and Ivy Variable Insurance Portfolios.

Forward-Looking Statements

This press release contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which
reflect the current views and assumptions of management with respect to
future events regarding our business and industry in general. These
forward-looking statements include all statements, other than statements
of historical fact, regarding our financial position, business strategy
and other plans and objectives for future operations, including
statements with respect to revenues and earnings, the amount and
composition of assets under management, distribution sources, expense
levels, redemption rates, stock repurchases and the financial markets
and other conditions. These statements are generally identified by the
use of such words as “may,” “could,” “should,” “would,” “believe,”
“anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,”
“project,” “outlook,” “will,” “potential” and similar statements of a
future or forward-looking nature. Readers are cautioned that any
forward-looking information provided by us or on our behalf is not a
guarantee of future performance. Actual results may differ materially
from those contained in these forward-looking statements as a result of
various factors, including but not limited to those discussed below. If
one or more events related to these or other risks, contingencies or
uncertainties materialize, or if our underlying assumptions prove to be
incorrect, actual results may differ materially from those forecasted or
expected. Certain important factors that could cause actual results to
differ materially from our expectations are disclosed in the “Risk
Factors” section of our Annual Report on Form 10-K for the year ended
December 31, 2016, which include, without limitation:

The loss of existing distribution channels or inability to access new
distribution channels;

A reduction in assets under our management on short notice, through
increased redemptions in our distribution channels or our Funds,
particularly those Funds with a high concentration of assets, or
investors terminating their relationship with us or shifting their
funds to other types of accounts with different rate structures;

The adverse ruling or resolution of any litigation, regulatory
investigations and proceedings, or securities arbitrations by a
federal or state court or regulatory body;

Changes in our business model, operations and procedures, including
our methods of distributing our proprietary products, as a result of
the Department of Labor’s new fiduciary rule;

The introduction of legislative or regulatory proposals or judicial
rulings that change the independent contractor classification of our
financial advisors at the federal or state level for employment tax or
other employee benefit purposes;

A decline in the securities markets or in the relative investment
performance of our Funds and other investment portfolios and products
as compared to competing funds;

Our inability to reduce expenses rapidly enough to align with declines
in our revenues, the level of our assets under management or our
business environment.

Non-compliance with applicable laws or regulations and changes in
current legal, regulatory, accounting, tax or compliance requirements
or governmental policies;

A failure in, or breach of, our operational or security systems or our
technology infrastructure, or those of third parties on which we rely;
and

Our inability to implement new information technology and systems, or
our inability to complete such implementation in a timely or cost
effective manner.

The foregoing factors should not be construed as exhaustive and
should be read together with other cautionary statements included in
this and other reports and filings we make with the Securities and
Exchange Commission, including the information in Item 1 “Business” and
Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of Part II to
our Annual Report on Form 10-K for the year ended December 31, 2016 and
as updated in our quarterly reports on Form 10-Q for the year ending
December 31, 2017. All forward-looking statements speak only as of the
date on which they are made and we undertake no duty to update or revise
any forward-looking statements, whether as a result of new information,
future events or otherwise, except to the extent required by law.

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